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Saturday, November 8, 2014

Minimum wage and productivity in Nepal and South Asia (plus China)

Here is an update on the minimum wage and labor productivity in South Asia (plus China). In 2012, in a series of blog posts (here and here— also, here and here), I indicated that the minimum wage in manufacturing sector in Nepal is the highest in South Asia. The latest updated data (sourced from DB2015) shows India’ and Pakistan’s minimum wages above Nepal’s.

At US$95 per month in 2014, the minimum wage in Nepal was the third highest in South Asia. The minimum wage in India and Pakistan was $142 per month and $110 per month, respectively. In 2012, Nepal had the highest minimum wage in South Asia. Minimum wage in Nepal has drastically increased from $32.3 in 2007— a 194% growth over 2007-2014.

Relative to Nepal’s level (=100 in the chart below), minimum wages in China, India, and Pakistan are higher. Sri Lanka had higher minimum wage than Nepal in 2013.

However, productivity has not kept pace with the increase in minimum wage. Compared to 2007, labor productivity (measured by the ratio of minimum wage to value added per worker – not a perfect indicator, but its okay for indicative purpose!) in Nepal decreased by 18%. In fact, India and Pakistan also saw a decline in labor productivity over the same period. Sri Lanka and China saw increase in labor productivity. The ratio of minimum wage to value added per worker in 2007 was 0.8, which increased to 0.9 in 2014 (a higher value indicates lower labor productivity). Note that value added per worker is also affected by quantity and quality of other inputs, particularly raw materials and physical and social infrastructures (electricity, transport, educated workforce, healthcare, etc). The average value added per worker is the ratio of an economy’s GNI per capita to the working-age population as a percentage of the total population.

Nepal’s labor productivity is the lowest in South Asia. The chart below shows South Asia’s (plus China’s) labor productivity relative to Nepal’s in 2013 and 2014. All of them have better productivity than Nepal’s. India’s and Nepal’s labor productivity seems to be converging lately. This opens up an opportunity to relocate manufacturing firms to Nepal as wages are lower here and productivity is pretty much similar. IF the other inputs listed above are reasonably supplied in Nepal (plus reasonable degree of political stability), there is no reason to doubt that an increasing number of firms may opt to base their manufacturing plants here.

Lower (competitive) wages and higher labor productivity attract domestic and foreign investment, which help to boost jobs creation and economic growth. Nepal’s formal sector labor market suffers from a high degree of unionism (often politically motivated and at times violent), which has resulted in the closure of many domestic as well as multinational firms. Overall, manufacturing sector has been weakening over the past several years. Its share of GDP declined to an estimated 5.6% in FY2014 from 8.2% of GDP in FY2002. The average growth rate has been a mere 3.2% in the last five years. Here is a related blog post on this issue.

About

Formerly, economics officer at Asian Development Bank, Nepal Resident Mission. Worked as a researcher at SAWTEE, Kathmandu. Also, worked as a consultant for Ministry of Commerce & Supplies, Government of Nepal; FAO; UNDP, GIZ-CIM, and ADB among others. I was an op-ed columnist for Republica between December 2008 – June 2012. I also worked as a Junior Fellow for Trade, Equity & Development program at Carnegie Endowment for International Peace, Washington, D.C .